Russian companies are being forced to throw oil at their dollar problem

A general view of the Russia's oil major LUKOIL oil refinery near the town of Kagalym in western Siberia, July 7, 2004.
REUTERS/Viktor Korotayev
Russian state-owned oil company Rosneft is being forced to front-load oil deals in order to quickly raise money to fund a $7 billion (£4.6 billion) debt repayment due on Feb. 13.

According to Reuters, the company has committed to sell around 500,000 metric tonnes of oil to Swiss oil trading company Trafigura this month. That figure is more than double its usual 150,000-200,000 tonnes agreed on as part of a five-year financing agreement reached in 2013.

The new deal with Trafigura — worth an additional $150 million — illustrates the huge pressure Rosneft is currently under to raise funds after international sanctions over Russia's role in Ukraine effectively cut the company off from international financial markets.

Many Russian oil companies are having difficulty gaining access to foreign currencies, such as dollars and euros, while the collapse in the ruble's value has sent the costs of foreign-currency debt payments soaring.

The sanctions prevent companies in the US and Europe from undertaking long-term financing deals with Russian firms, but allow for short-term financing arrangements of up to 30 days, Reuters reports. For companies with sizeable foreign debt obligations, such as Rosneft, this is proving a huge problem.

Trafigura has only been able to retain its ties with Rosneft because its original deal was struck before the sanctions came into effect. Now it is becoming a lifeline.

As Rosneft is no longer able to borrow against its future earnings from the markets as a company would normally be able to do but is having to exchange its product (oil) for dollars as its debts come due. In effect, it is settling its debts with oil.

Even the head of Russia's central bank has said that the deal was "opaque" and may have helped drive further falls in the value of the ruble. And that's a big problem for Rosneft and other large Russian companies — there is no shortage of available ruble funding but tapping it helps sink the value of the currency and drives up the cost of repaying the foreign-currency debt.

In short, we can expect a lot more of these types of deals in the near future.